Fitch: Global Sovereign Sector’s Mid Year Outlook To Be Neutral

Fitch Ratings expects global sovereigns’ overall macro-credit conditions and prospects to remain broadly net neutral compared with 2023, in line with its 2024 outlook published in December.

The ratings agency forecasts that the global economic growth to be moderately weaker than last year, as it eases eventually
in the US. Europe has passed its cyclical trough, but the recovery will be subdued. Fiscal stimulus will support growth in China, but the property slump and shift in growth model entail risks. Lowerinflation will enable most central banks to cut policy interest rates. However, further setbacks tothe disinflation path in the US could constrain the Federal Reserve with adverse implications for global bond yields and increase upward pressure on the US dollar.

Such a combination could weigh on this year’s improvement in emerging-market (EM) financing conditions evident in a narrowing of bond spreads and re-access of international bond markets by some low-rated sovereigns. Continued access to IMF funding will be important for distressed frontier markets including Argentina, Egypt, Pakistan and Sri Lanka. Sovereign interest costs are continuing to rise, particularly for developed markets, as debt stocks amortise and are refinanced at current bond market yields. These and broader expenditure pressures mean we forecast a stalling in post-Covid-19 pandemic improvements in median budget deficits (at 2.8% of GDP) and government debt/GDP (at 55.2%) this year.

Aggregate public debt is rising rapidly owing to trends in the US and China. Geopolitical risks – including wars in Ukraine and the Middle East, US-China rivalry, and more protectionist trade and industrial policies – are likely to persist.
Moderate Positive Rating Momentum Year-to-Date Rating upgrades have outpaced downgrades by 9 to 3 in 1H24 although global average ratings remain well below the pre-pandemic level. Net positive rating Outlooks are now +7, and earlier this
year reached the highest level (at +10) since 2007. Positive rating Outlooks are concentrated in emerging markets. However, the GDP and debt-weighted net Outlooks are Negative, reflecting the weight of China.

Ed Parker, Global Head of Sovereign Research notes “The neutral outlook for global sovereigns reflects moderately weaker
global economic growth and persistent strains on public finances balanced against lower inflation and some easing in financial conditions. Geopolitics is a potentially consequential downside risk.”

Global Sovereigns Mid-Year Outlook 2024
What to Watch

Strains on public finances will persist owing to higher real interest costs, expenditure pressures to insulate living standards and improve security, and moderate growth prospects.

Setbacks to US disinflation could temper or forestall lower bond yields and strengthen the US dollar, adversely affecting growth, sovereign borrowing costs and EM financing conditions.

Intensification of geopolitical risks could trigger a change in the outlook to ‘deteriorating’. The re-election of Donald Trump could add to macro, policy and geopolitical uncertainties.

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